Auditing Exam Preparation Guide
Course Introduction
Auditing is a comprehensive course that introduces students to the fundamental principles, methodologies, and applications of auditing in the context of financial reporting. The course covers topics such as audit planning, risk assessment, internal controls, evidence collection, and audit reporting, emphasizing ethical standards and professional responsibilities of auditors. Students will explore the regulatory environment governing audits, analyze real-world case studies, and gain practical skills in identifying and evaluating audit risks. By the end of the course, students will be equipped with a solid understanding of how audits contribute to transparency, accuracy, and trust in financial information.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 9th Edition by William F. Messier
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2
Chapter 1: An Introduction to Assurance and Financial Statement
Auditing
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46 Verified Questions
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Sample Questions
Q1) Auditing services and attestation services are the same.
A)True
B)False
Answer: False
Q2) In the context of agency theory, information asymmetry refers to the idea that
A) Information can vary in its reliability.
B) Information can vary in its relevance.
C) Management has more information about the entity's true financial position than do the absentee owners (i.e. stockholders).
D) Management likely will not act in the best interests of the absentee owners.
Answer: C
Q3) Conflicts of interest often occur between absentee owners and managers.
A)True
B)False
Answer: True
Q4) Decision makers demand reliable information that is provided by accountants. A)True
B)False
Answer: True
Page 3
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) The objective of the second PCAOB Standard of Reporting is to provide assurance that
A) There are no variations in the format and presentation of financial statements.
B) Substantially different transactions and events are not accounted for on an identical basis.
C) The auditor is consulted before material changes are made in the application of accounting principles.
D) The comparability of financial statements between periods is not materially affected by changes in accounting principles that are not disclosed.
Answer: D
Q2) Typically, an external auditor first gets supervisory experience at what level of authority?
A) Associate.
B) Senior.
C) Manager.
D) Partner.
Answer: B
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Page 4
Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Q1) The Code of Professional Conduct does not allow an auditor to disclose confidential client information without the client's consent.
A)True
B)False
Answer: True
Q2) Before accepting an engagement to audit a new client, a CPA is required to obtain
A) An understanding of the prospective client's industry and business.
B) The prospective client's signature on the engagement letter.
C) A preliminary understanding of the prospective client's control environment.
D) The prospective client's consent to make inquiries of the predecessor auditor.
Answer: D
Q3) Materiality is based only on a quantitative analysis of the financial statements.
A)True
B)False
Answer: False
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Chapter 4: Risk Assessment
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Sample Questions
Q1) Engagement risk is
A) The risk of issuing an incorrect audit opinion.
B) The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
C) The overall risk of material misstatement.
D) The risk of the entity's financial failure.
Q2) Which of the following is correct concerning required auditor communications about fraud?
A) Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.
B) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
C) Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.
D) The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.
Q3) What is the difference between audit risk and engagement risk?
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) Audit documentation prepared on audits of public entities is the property of the A) Shareholders.
B) Auditor.
C) Management of the entity being audited.
D) SEC.
Q2) The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation, the auditor should
A) Consider the matter a scope limitation.
B) Perform additional audit procedures to investigate the matter further.
C) Intensify the examination with the expectation of detecting management fraud.
D) Withdraw from the engagement.
Q3) Explain the occurrence and completeness assertions. How does failure to meet each assertion affect the financial statements?
Q4) Which assertions may be tested for the "account balances" category of management assertions?
A) Existence, accuracy, rights and obligations, completeness.
B) Existence, rights and obligations, completeness, valuation and allocation.
C) Occurrence, rights and obligations, completeness, valuation and allocation.
D) Occurrence, accuracy, rights and obligations, completeness.
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) Which of the following procedures most likely would be included as part of an auditor's tests of controls?
A) Inspection.
B) Reconciliation.
C) Confirmation.
D) Analytical procedures.
Q2) Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?
A) Hash total.
B) Parity check.
C) Encryption.
D) Check digit.
Q3) Data capture occurs through source documentation, direct data entry, or a combination of the two. List three purposes of data capture controls.
Q4) Internal control consists of six components.
A)True
B)False
Q5) Why might an auditor decide to test controls at an interim date?
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is
A) A material weakness.
B) A significant deficiency.
C) An insignificant deficiency.
D) A probable deficiency.
Q2) When testing a computerized accounting system, which of the following is false regarding the test data approach?
A) The test data need to consist of only those valid and invalid conditions in which the auditor is interested.
B) Only one transaction of each type needs be tested.
C) Test data are processed by the entity's computer programs under the auditor's control.
D) The test data must consist of all possible valid and invalid conditions.
Q3) Most public companies must follow the guidelines of AS5.
A)True
B)False
Q4) Discuss entity-level controls and provide examples of these types of controls.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) Attribute sampling is used to estimate the proportion of a population that possesses a specified characteristic.
A)True
B)False
Q2) Which of the following best illustrates the concept of sampling risk?
A) A randomly chosen sample may not be representative of the population as a whole (regarding the characteristic being tested).
B) An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C) An auditor may fail to recognize errors in the documents examined for the chosen sample.
D) The documents related to the chosen sample may not be available for inspection.
Q3) A Type I error is the risk of incorrect acceptance.
A)True
B)False
Q4) Confidence level and sampling risk are related to sample size.
A)True
B)False
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) You have been placed in charge of determining the sample size for an audit of accounts receivable. Your superior would like a confidence level of 99%. How does this affect your determination of sample size? What can you infer about the level of risk of incorrect acceptance that your superior is willing to accept?
Q2) Monetary-unit sampling is commonly used by auditors to test controls.
A)True
B)False
Q3) You are auditing accounts receivable for a small company and have found the following results:
Q4) Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?
A) Expected amount of misstatement but not the measure of tolerable misstatement.
B) Expected amount of misstatement and the measure of tolerable misstatement.
C) Measure of tolerable misstatement but not the expected amount of misstatement.
D) Neither the expected amount of misstatement nor the measure of tolerable misstatement.
Q5) What is one advantage and one disadvantage of classical variables sampling?
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a listing of remittances that is forwarded to the cashier. A copy of the listing should be sent to the
A) Internal auditor to investigate the listing for unusual transactions.
B) Treasurer to compare the listing with the monthly bank statement.
C) Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D) Entity's bank to compare the listing with the cashier's deposit slip.
Q2) In the confirmation of accounts receivable, the auditor would most likely
A) Randomly select a representative sample of accounts for confirmation.
B) Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
C) Require confirmation of all receivables from agencies of the federal government.
D) Require that confirmation requests be sent within one month of the fiscal year-end.
Q3) What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?
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Page 12
Chapter 11: Auditing the Purchasing Process
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80 Verified Questions
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Sample Questions
Q1) An entity erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error in a timely and efficient manner?
A) Footing the purchases journal.
B) Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
C) Tracing totals from the purchases journal to the ledger accounts.
D) Sending written quarterly confirmations to all vendors.
Q2) A voucher
A) Is a bill from the vendor.
B) Is a document that records the receipt of goods.
C) Is a document that requests goods from an authorized individual in the entity.
D) Serves as the basis for recording a vendor's invoice in the purchases journal.
Q3) Identify the primary functions in the purchases cycle and describe each function.
Q4) The key inherent risk factors an auditor must consider when auditing the purchasing process are industry factors. Which two are most important and why?
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Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) In testing the payroll of a large company, the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review. What will be the best source to determine this?
A) Telephone contacts with the employees.
B) Tracing from the payroll register to the employee's earnings records.
C) Confirmation with the union or other independent organization.
D) Examination of Human Resource Department records.
Q2) There are few inherent risk factors that directly affect the human resource management process and its related accounts for non-officers.
A)True
B)False
Q3) The proper use of prenumbered termination notice forms by the Payroll Department should provide assurance that all
A) Uncashed payroll checks were issued to employees who have not been terminated.
B) Personnel files are kept up to date.
C) Employees who have not been terminated receive their payroll checks.
D) Terminated employees are removed from the payroll.
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Page 14
Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) When outside firms of non-accountants specializing in physical inventory counts are used to count, list, price, and subsequently compute the total dollar amount of inventory on hand at the date of the physical count, the auditor will ordinarily
A) Consider the report of the outside inventory firm to be an acceptable alternative procedure to the observation of physical inventories.
B) Make or observe some physical counts of the inventory, recompute certain inventory calculations, and test certain inventory transactions.
C) Increase the extent of work on the physical count of inventory.
D) Consider the reduced audit effort with respect to the physical count of inventory as a scope limitation.
Q2) When the entity's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.
A)True
B)False
Q3) Explain the importance of observing physical inventory during an audit.
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Chapter 14: Auditing the Financing Investing Process:
Prepaid Expenses Intangible Assets and Property Plant and Equipment
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Sample Questions
Q1) The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective?
A) Depreciation expense/book value of manufacturing equipment.
B) Accumulated depreciation/book value of manufacturing equipment.
C) Repairs and maintenance cost/direct labor costs.
D) Gross manufacturing equipment cost/units produced.
Q2) Substantive analytical procedures should not be used in the audit of property, plant, and equipment.
A)True
B)False
Q3) Describe the types of information that should be included in the schedule of prepaid insurance that is used by the auditor as the basis for auditing prepaid insurance.
Q4) An example of a prepaid account is prepaid interest.
A)True
B)False
Page 16
Q5) Identify the types of transactions that occur in the property management process.
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Chapter 15: Auditing the Financing Investing Process:
Long-Term Liabilities Stockholders Equity and Income
Statement Accounts
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Sample Questions
Q1) Valuation and allocation is most likely an issue for long-term debt if
A) Bonds are sold on the open market.
B) Bonds are issued at a discount or premium.
C) The loans are from banks.
D) The company has many short-term leases.
Q2) The auditor's program for the examination of long-term debt should include steps that require the
A) Verification of the existence of the bond holders.
B) Examination of any bond agreement.
C) Inspection of the accounts payable subsidiary ledger.
D) Investigation of credits to the bond interest income account.
Q3) An audit of stockholders' equity ordinarily should include
A) Tracing individual dividend payments to the capital stock records.
B) Reviewing minutes of board meetings to determine the number of shares outstanding.
C) Confirming shares outstanding with state officials.
D) Determining that dividend declarations comply with debt agreements.
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Q4) Identify the four major assertions made regarding stockholders' equity and describe one control activity for each.
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) The general cash account is normally the principal account used to disburse payroll. A)True
B)False
Q2) An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when the
A) Check register for the last month is reviewed.
B) Cutoff bank statement is reconciled.
C) Bank confirmation is reviewed.
D) Search for unrecorded liabilities is performed.
Q3) Kiting is an audit procedure used to test the accuracy of the cash receipts.
A)True
B)False
Q4) To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the:
A) Cutoff bank statement.
B) Year-end bank statement.
C) Bank confirmation.
D) General ledger.
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) Which of the following procedures should an auditor generally perform regarding subsequent events?
A) Compare the latest available interim financial statements issued after year-end with the financial statements being audited.
B) Send second requests to the entity's customers who failed to respond to initial accounts receivable confirmation requests.
C) Communicate material weaknesses in internal controls to those charged with governance.
D) Review the cutoff bank statements for several months after year-end.
Q2) An entity has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The entity refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must
A) Require classification of bonds payable as a current liability.
B) Contact the bond trustee directly.
C) Disclose the situation in the auditor's report.
D) Obtain an opinion from the company's attorney as to the likelihood of the trustee's enforcement of the requirement.
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) In the auditor's report, the principal auditor decides not to make reference to another CPA who audited an entity's subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor
A) Issues an unqualified/unmodified opinion on the consolidated financial statements.
B) Learns that the other CPA issued an unqualified/unmodified opinion on the subsidiary's financial statements.
C) Is unable to review the other CPA's audit programs and working papers.
D) Is satisfied as to the other CPA's independence and professional reputation.
Q2) Which of the following would not require an explanatory/emphasis-of-matter paragraph in the auditor's report?
A) Additional emphasis.
B) Lack of consistency in the financial statements due to accounting changes.
C) Going concern.
D) Opinion based in part on the report of another auditor.
Q3) An auditor must disclaim an opinion when the auditor lacks independence.
A)True
B)False
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Sample Questions
Q1) When can a CPA disclose confidential information without the client's consent?
Q2) An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee
A) Was unusually large.
B) Has not been paid and will not be paid for at least twelve months.
C) Has not been paid and the client has filed a voluntary petition for bankruptcy.
D) Was renegotiated during the prior year audit based on the need for expanded testing.
Q3) Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?
A) Using the audit risk model.
B) Using statistical sampling techniques.
C) Assigning personnel to engagements.
D) Considering audit risk and materiality.
Q4) Ethical rulings are enforceable.
A)True
B)False
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Chapter 20: Legal Liability
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Sample Questions
Q1) Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security's registration statement. Under Section 11, a CPA usually will not be liable to the purchaser
A) If there is contributory negligence on the part of the purchaser.
B) If the CPA can prove due diligence.
C) Unless the purchaser can prove privity with the CPA.
D) Unless the purchaser can prove scienter on the part of the CPA.
Q2) An auditor can be guilty under federal statutory law if s/he was reckless in performance of her/his professional duties.
A)True
B)False
Q3) The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by
A) Expanding laws against fraud and obstruction of justice.
B) Increasing criminal penalties for fraud and its cover-up.
C) Strengthening sentencing guidelines applicable to large-scale frauds.
D) All of these are true.
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Sample Questions
Q1) Statements on Standards for Accounting and Review Services (SSARS) require an accountant to report when the accountant has
A) Typed client-prepared financial statements, without modification, as an accommodation to the client.
B) Provided an entity with a financial statement format that does not include dollar amounts, to be used by the entity in preparing financial statements.
C) Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.
D) Generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.
Q2) An attest service occurs when a practitioner is engaged to issue a report on subject matter that is the responsibility of another party.
A)True
B)False
Q3) How has the advancement in technology led to the creation of the Trust Services?
Q4) Explain each of the three PrimePlus Services typically offered by practitioners.
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Page 23